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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12762
MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact Name of Registrant as Specified in Charter)
TENNESSEE 62-1543819
(State of Incorporation) (I.R.S. Employer Identification Number)
6584 POPLAR AVENUE, SUITE 300
MEMPHIS, TENNESSEE 38138
(Address of principal executive offices)
(901) 682-6600
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at Julyl 15, 2002
Common Stock, $.01 par value 17,634,516
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
December 31, 2001
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Mid-America Apartment Communities, Inc.
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001
(Dollars in thousands)
2002 2001
------------- -------------
Assets:
Real estate assets:
Land $ 124,130 $ 124,993
Buildings and improvements 1,276,873 1,265,327
Furniture, fixtures and equipment 33,499 32,290
Construction in progress 8,145 10,915
- -----------------------------------------------------------------------------------------------------
1,442,647 1,433,525
Less accumulated depreciation (256,323) (229,913)
- -----------------------------------------------------------------------------------------------------
1,186,324 1,203,612
Land held for future development 1,366 1,366
Commercial properties, net 4,537 4,910
Investment in and advances to real estate joint venture 6,711 7,045
- -----------------------------------------------------------------------------------------------------
Real estate assets, net 1,198,938 1,216,933
Cash and cash equivalents 16,103 12,192
Restricted cash 9,241 11,240
Deferred financing costs, net 9,664 10,415
Other assets 17,016 12,708
- -----------------------------------------------------------------------------------------------------
Total assets $ 1,250,962 $ 1,263,488
=====================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Notes payable $ 788,136 $ 779,664
Accounts payable 1,546 1,219
Accrued expenses and other liabilities 36,284 31,691
Security deposits 4,643 4,514
Deferred gain on disposition of properties 4,043 4,140
- -----------------------------------------------------------------------------------------------------
Total liabilities and deferred gain 834,652 821,228
Minority interest 43,106 46,431
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
$173,470,750 or $25 per share liquidation preference:
2,000,000 shares at 9.5% Series A Cumulative 20 20
1,938,830 shares at 8.875% Series B Cumulative 19 19
2,000,000 shares at 9.375% Series C Cumulative 20 20
1,000,000 shares at 9.5% Series E Cumulative 10 10
Common stock, $.01 par value (authorized 50,000,000 shares;
issued 17,628,760 and 17,452,678 shares at
June 30, 2002 and December 31, 2001, respectively) 176 175
Additional paid-in capital 554,387 550,176
Other (4,612) (774)
Accumulated distributions in excess of net income (164,290) (145,061)
Accumulated other comprehensive loss (12,526) (8,756)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 373,204 395,829
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,250,962 $ 1,263,488
=====================================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three and six months ended June 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------- -----------
Revenues:
Rental revenues $ 55,955 $ 56,699 $ 110,979 $ 112,234
Other property revenues 737 754 1,372 1,500
- --------------------------------------------------------------------------------------------------------------------------
Total property revenues 56,692 57,453 112,351 113,734
Interest and other non-property income 168 429 302 716
Management and fee income, net 193 191 379 379
Equity in loss of real estate joint venture (190) 34 (213) (111)
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 56,863 58,107 112,819 114,718
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Property operating expenses:
Personnel 6,528 6,117 13,013 12,159
Building repairs and maintenance 2,363 2,374 4,538 4,409
Real estate taxes and insurance 6,986 6,708 13,988 13,358
Utilities 1,656 1,711 3,228 3,719
Landscaping 1,570 1,575 3,113 3,101
Other operating 2,350 2,685 4,760 5,226
Depreciation and amortization 13,647 13,094 27,156 26,091
- --------------------------------------------------------------------------------------------------------------------------
35,100 34,264 69,796 68,063
Property management expenses 2,478 2,693 4,950 5,282
General and administrative expenses 1,511 1,472 2,957 2,913
Interest expense 12,362 13,843 24,724 27,302
Amortization of deferred financing costs 664 636 1,321 1,165
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 52,115 52,908 103,748 104,725
- --------------------------------------------------------------------------------------------------------------------------
Income before gain on dispositions,
minority interest in operating partnership
income and extraordinary items 4,748 5,199 9,071 9,993
Net gain (loss) on disposition of assets and
insurance settlement proceeds 501 (5) 565 164
- --------------------------------------------------------------------------------------------------------------------------
Income before minority interest in operating
partnership income and extraordinary items 5,249 5,194 9,636 10,157
Minority interest in operating partnership income 251 149 338 251
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 4,998 5,045 9,298 9,906
Extraordinary items - loss on debt extinguishment,
net of minority interest (28) (443) (28) (443)
- --------------------------------------------------------------------------------------------------------------------------
Net income 4,970 4,602 9,270 9,463
Preferred dividend distribution 4,029 4,029 8,057 8,057
- --------------------------------------------------------------------------------------------------------------------------
Net income available for common shareholders $ 941 $ 573 $ 1,213 $ 1,406
==========================================================================================================================
(Continued)
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations (Continued)
Three and six months ended June 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
---------------- ---------- -------------- -----------
Net income available per common share:
Basic (in thousands):
Average common shares outstanding 17,498 17,397 17,477 17,438
==========================================================================================================================
Basic earnings per share:
Net income available per common share $ 0.06 $ 0.06 $ 0.07 $ 0.11
before extraordinary items
Extraordinary items (0.01) (0.03) - (0.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income available per common share $ 0.05 $ 0.03 $ 0.07 $ 0.08
==========================================================================================================================
Diluted (in thousands):
Average common shares outstanding 17,498 17,397 17,477 17,438
Effect of dilutive stock options 251 83 196 57
- --------------------------------------------------------------------------------------------------------------------------
Average dilutive common shares outstanding 17,749 17,480 17,673 17,495
==========================================================================================================================
Diluted earnings per share:
Net income available per common share $ 0.05 $ 0.06 $ 0.07 $ 0.11
before extraordinary items
Extraordinary items - (0.03) - (0.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income available per common share $ 0.05 $ 0.03 $ 0.07 $ 0.08
==========================================================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001
(Dollars in thousands)
2002 2001
-------------- -----------
Cash flows from operating activities:
Net income $ 9,270 $ 9,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 28,477 27,256
Amortization of unearned stock compensation 295 207
Equity in loss of real estate joint venture 213 111
Minority interest in operating partnership income 338 251
Extraordinary items 28 443
Net gain on dispositions and insurance settlement proceeds (565) (164)
Changes in assets and liabilities:
Restricted cash 1,999 3,572
Other assets (4,308) 3,526
Accounts payable 327 (463)
Accrued expenses and other 1,177 (1,709)
Security deposits 129 112
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,380 42,605
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Improvements to properties (7,987) (8,973)
Construction of units in progress and future development (1,394) (12,495)
Distributions from real estate joint venture 121 253
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,260) (21,215)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in credit lines 16,020 2,274
Proceeds from notes payable - 40,737
Principal payments on notes payable (7,581) (33,918)
Payment of deferred financing costs (570) (1,521)
Repurchase of common stock - (2,878)
Proceeds from issuances of common shares and units (170) 516
Distributions to unitholders (3,409) (3,508)
Dividends paid on common shares (20,442) (20,377)
Dividends paid on preferred shares (8,057) (8,057)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (24,209) (26,732)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,911 (5,342)
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 12,192 16,095
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 16,103 $ 10,753
========================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 24,844 $ 27,356
Supplemental disclosure of noncash investing and financing activities:
Conversion of units for common shares $ 249 $ 167
Issuance of restricted common shares $ 2,639 $ 120
Interest capitalized $ 239 $ 811
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001 (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies in effect as of December 31, 2001, as
set forth in the annual consolidated financial statements of Mid-America
Apartment Communities, Inc. ("MAAC" or the "Company"), as of such date. In the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included and all such adjustments
were of a normal recurring nature. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
for the three and six month periods ended June 30, 2002 is not necessarily
indicative of the results to be expected for the full year.
2. Share and Unit Information
At June 30, 2002, 17,628,760 common shares and 2,901,626 operating partnership
units were outstanding, a total of 20,530,386 shares and units. Additionally,
MAAC had outstanding options for 1,512,154 shares of common stock at June 30,
2002.
3. Segment Information
At June 30, 2002, the Company owned or had ownership interest in, and operated
122 apartment communities in 12 different states from which it derives all
significant sources of earnings and operating cash flows. The Company's
operational structure is organized on a decentralized basis, with individual
property managers having overall responsibility and authority regarding the
operations of their respective properties. Each property manager individually
monitors local and area trends in rental rates, occupancy percentages, and
operating costs. Property managers are given the on-site responsibility and
discretion to react to such trends in the best interest of the Company.
Management evaluates the performance of each individual property based on its
contribution of revenues and net operating income ("NOI"), which is composed of
property revenues less all operating costs including insurance and real estate
taxes. The Company's reportable segments are its individual properties because
each is managed separately and requires different operating strategy and
expertise based on the geographic location, community structure and quality,
population mix, and numerous other factors unique to each community.
The revenues, profits and assets for the aggregated communities are summarized
as follows (Dollars in thousands):
Three months Six months
ended June 30, ended June 30,
------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------- -------------
Multifamily rental revenues $ 60,619 $ 61,429 $120,260 $121,674
Other multifamily revenues 777 793 1,448 1,577
------------ ------------ ---------------------------
Segment revenues 61,396 62,222 121,708 123,251
Reconciling items to consolidated revenues:
Joint venture revenues (4,704) (4,769) (9,357) (9,517)
Interest and other non-property income 168 191 302 716
Management fee income, net 193 34 379 379
Equity in loss of real estate joint venture (190) 429 (213) (111)
------------ ------------ ---------------------------
Total revenues $ 56,863 $ 58,107 $112,819 $114,718
============ ============ ===========================
Multifamily net operating income $ 37,878 $ 39,037 $ 74,995 $ 77,204
Reconciling items to net income available for common shareholders:
Joint venture net operating income (2,639) (2,754) (5,284) (5,442)
Interest and other non-property income 168 429 302 716
Management and fee income, net 193 191 379 379
Equity in loss of real estate joint venture (190) 34 (213) (111)
Property management expenses (2,478) (2,693) (4,950) (5,282)
General and administrative expenses (1,511) (1,472) (2,957) (2,913)
Depreciation and amortization (13,647) (13,094) (27,156) (26,091)
Interest expense (12,362) (13,843) (24,724) (27,302)
Amortization of deferred financing costs (664) (636) (1,321) (1,165)
Net gain (loss) on dispositions and insurance settlement proceeds 501 (5) 565 164
Minority interest in operating partnership (251) (149) (338) (251)
Extraordinary items, net (28) (443) (28) (443)
Dividends on preferred shares (4,029) (4,029) (8,057) (8,057)
------------ ------------ ---------------------------
Net income available for common shareholders $ 941 $ 573 $ 1,213 $ 1,406
============ ============ ===========================
June 30, 2002 December 31, 2001
----------------------- -----------------------
Assets:
Multifamily real estate assets $ 1,547,483 $ 1,537,625
Accumulated depreciation - multifamily assets (268,057) (239,586)
----------------------- -----------------------
Segment assets 1,279,426 1,298,039
Reconciling items to total assets:
Joint venture multifamily real estate assets, net (93,102) (94,427)
Land held for future development 1,366 1,366
Commercial properties, net 4,537 4,910
Investment in and advances to real estate joint venture 6,711 7,045
Cash and restricted cash 25,344 23,432
Other assets 26,680 23,123
----------------------- -----------------------
Total assets $ 1,250,962 $ 1,263,488
======================= =======================
4. Derivative Financial Instruments
In the normal course of business, the Company uses certain derivative financial
instruments to manage, or hedge, the interest rate risk associated with the
Company's variable rate debt or as hedges in anticipation of future debt
transactions to manage well-defined interest rate risk associated with the
transaction.
The Company does not use derivative financial instruments for speculative or
trading purposes. Further, the Company has a policy of entering into contracts
with major financial institutions based upon their credit rating and other
factors. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designated to hedge, the Company has not sustained any
material loss from those instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
The Company requires that hedging derivatives instruments are effective in
reducing the interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Instruments that
meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk-management
objective and strategy for undertaking the hedge transaction. This process
includes linking all derivatives that are designated as fair-value or cash flow
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedges inception and on an ongoing basis, whether the derivatives
used are highly effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly effective as
a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
All of the Company's derivative financial instruments are reported at fair value
and are represented on the balance sheet were characterized as cash flow hedges.
These transactions hedge the future cash flows of debt transactions through
interest rate swaps that convert variable payments to fixed payments. The
unrealized gains/losses in the fair value of these hedges are reported on the
balance sheet with a corresponding adjustment to accumulated other comprehensive
income, with any ineffective portion of the hedging transactions reclassified to
earnings. During the three months ended June 30, 2002, the ineffective portion
of the hedging transactions was not significant. Within the next twelve months,
the Company expects to reclassify to earnings an estimated $100,000 of the
current balance held in accumulated other comprehensive income due to the
ineffectiveness associated with the hedging transactions.
5. Comprehensive Income
Total comprehensive income and its components for the three and six months ended
June 30, 2002 and 2001 were as follows (Dollars in thousands):
Three months ended June 30, Six months ended June 30,
------------------------------------- -----------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- ----------------
Net income $ 4,970 $ 4,602 $ 9,270 $ 9,463
Marked-to-market adjustment
on derivative instruments (7,558) 1,899 (3,770) (2,072)
----------------- ----------------- ---------------- ----------------
Total comprehensive income $ (2,588) $ 6,501 $ 5,500 $ 7,391
================= ================= ================ ================
6. Goodwill and Intangible Assets - Adoption of Statement 142
In July 2001, the Financial Accounting Standard Board ("FASB") issued Statement
No. 142, Goodwill and Other Intangible Assets (Statement 142), which requires
goodwill and intangible assets with indefinite useful lives to no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of the Statement. Statement 142 also requires intangible
assets with estimable useful lives be amortized over the respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
The Company adopted Statement 142 as of January 1, 2002 and has since completed
the process of evaluating its goodwill balances to determine if any impairment
exists. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the Company's
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of the date of adoption. The Company then calculated
the estimated fair value of each reporting unit and compared it to the carrying
amount of each reporting unit.
The Company's testwork indicated no impairment of goodwill for its reporting
units.
The Company will continue to test reporting unit goodwill for potential
impairment on an annual basis in the Company's fiscal fourth quarter, or sooner
if a goodwill impairment indicator is identified.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $5.8 million, all of which was subject to the transition provisions of
Statement 142.
Statement 142 requires disclosure of what net income would have been in all
periods presented exclusive of amortization expense recognized in those periods
related to goodwill. Below is a reconciliation of reported net income to
adjusted net income and earnings per share (Dollars in thousands, except
earnings per share):
Three months ended June 30,
---------------------------------------------------------
2001
-------------------------------------------
2002 Adjusted Adjustment Reported
------------ ------------- ----------------------------
Income before extraordinary items $ 4,998 $ 5,111 $ 66 $ 5,045
Extraordinary items (28) (443) - (443)
------------ ------------- -------------- ------------
Net income 4,970 4,668 66 4,602
Preferred dividend distribution 4,029 4,029 - 4,029
------------ ------------- -------------- ------------
Net income available for common shareholders $ 941 $ 639 $ 66 $ 573
============ ============= ============== ============
Basic earnings per share
Net income available per common share $ 0.06 $ 0.06 $ 0.00 $ 0.06
before extraordinary items
Extraordinary items (0.01) (0.03) - (0.03)
------------ ------------- -------------- ------------
Net income available per common share $ 0.05 $ 0.03 $ 0.00 $ 0.03
============ ============= ============== ============
Diluted earnings per share
Net income available per common share $ 0.05 $ 0.06 $ 0.00 $ 0.06
before extraordinary items
Extraordinary items - (0.03) - (0.03)
------------ ------------- -------------- ------------
Net income available per common share $ 0.05 $ 0.03 $ 0.00 $ 0.03
============ ============= ============== ============
Six months ended June 30,
---------------------------------------------------------
2001
-------------------------------------------
2002 Adjusted Adjustment Reported
------------ ------------- ----------------------------
Income before extraordinary items $ 9,298 $ 10,038 $ 132 $ 9,906
Extraordinary items (28) (443) - (443)
------------ ------------- -------------- ------------
Net income 9,270 9,595 132 9,463
Preferred dividend distribution 8,057 8,057 - 8,057
------------ ------------- -------------- ------------
Net income available for common shareholders $ 1,213 $ 1,538 $ 132 $ 1,406
============ ============= ============== ============
Basic earnings per share
Net income available per common share $ 0.07 $ 0.12 $ 0.01 $ 0.11
before extraordinary items
Extraordinary items - (0.03) - (0.03)
------------ ------------- -------------- ------------
Net income available per common share $ 0.07 $ 0.09 $ 0.01 $ 0.08
============ ============= ============== ============
Diluted earnings per share
Net income available per common share $ 0.07 $ 0.12 $ 0.01 $ 0.11
before extraordinary items
Extraordinary items - (0.03) - (0.03)
------------ ------------- -------------- ------------
Net income available per common share $ 0.07 $ 0.09 $ 0.01 $ 0.08
============ ============= ============== ============
7. Subsequent Events
Acquisition
On July 2, 2002, the Company acquired the Preston Hills apartments, a 464-unit
property located in a northeast suburb of Atlanta, GA for $33.7 million. The
Company intends to transfer, at the Company's cost, the Preston Hills apartments
into the Company's new joint venture.
Derivative Financial Instrument
On July 17, 2002, the Company entered into a forward interest rate swap
agreement with First Tennessee Bank National Association. The 5-year agreement
is for a 3-month LIBOR fixed leg with an effective date of June 1, 2003 and a
notional amount of $50 million.
Credit Facility
On July 2, 2002 the Company established a $7 million credit facility with
AmSouth Bank which expires October 31, 2002.
PART I. Financial Information
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three and six months ended June 30,
2002 and 2001. This discussion should be read in conjunction with the financial
statements appearing elsewhere in this report. These financial statements
include all adjustments, which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal recurring nature.
The total number of apartment units the Company owned or had an ownership
interest in, including the 10 properties containing 2,793 apartment units owned
by its 33.33% unconsolidated BRE/MAAC Associates, LLC joint venture, at June 30,
2002 was 33,459 in 122 communities compared to 33,778 units in 124 communities
owned at June 30, 2001. The average monthly rental per apartment unit for the
Company's non-development, 100% owned apartment units increased to $660 at June
30, 2002 from $650 at June 30, 2001. Occupancy for these same apartment units at
June 30, 2002 and 2001 was 94.9% and 94.3%, respectively.
In June 2002, the Company formed a joint venture with Crow Holdings named
Mid-America/CH Realty Limited Partnership. The joint venture is expected to
acquire approximately $150 million of multifamily properties. The Company will
provide acquisition, redevelopment and property management services to
Mid-America/CH Realty Limited Partnership and will own a 33.33% interest in the
partnership. At June 30, 2002 there were no properties owned by the
Mid-America/CH Realty Limited Partnership joint venture.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") represents net income (computed in accordance with
accounting principles generally accepted in the United States of America, or
"GAAP") excluding extraordinary items, minority interest in Operating
Partnership income, gain or loss on disposition of real estate assets, plus
depreciation related to real estate, and adjustments for the Joint Venture to
reflect FFO on the same basis. This definition of FFO is in accordance with the
National Association of Real Estate Investment Trust's ("NAREIT") recommended
definition.
The Company's policy is to expense the cost of interior painting, vinyl
flooring, and blinds as incurred for stabilized properties. During the
stabilization period for acquisition properties, these items are capitalized as
part of the total repositioning program of newly acquired properties, and, thus
are not deducted in calculating FFO.
FFO should not be considered as an alternative to net income or any other GAAP
measurement of performance, as an indicator of operating performance or as an
alternative to cash flow from operating, investing, and financing activities as
a measure of liquidity. The Company believes that FFO is helpful in
understanding the Company's results of operations in that such calculation
reflects the Company's ability to support interest payments and general
operating expenses before the impact of certain activities such as changes in
other assets and accounts payable. The Company's calculation of FFO may differ
from the methodology for calculating FFO utilized by other REITs and,
accordingly, may not be comparable to such other REITs. Depreciation expense
includes approximately $556,000 and $325,000 for the six months ended June 30,
2002 and 2001, respectively, which relates to computer software, office
furniture and fixtures and other assets found in other industries and which is
required to be recognized, for purposes of computing FFO.
FFO for the three and six months ended June 30, 2002 and 2001 is calculated as
follows (in thousands):
Three months Six months
ended June 30, ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income available for common shareholders $ 941 $ 573 $ 1,213 $ 1,406
Depreciation and amortization - real property 13,361 12,936 26,600 25,766
Adjustment for joint venture depreciation 345 314 688 627
Minority interest in operating partnership 251 149 338 251
Gain on disposition of non-depreciable assets - (5) - 229
included in FFO
Net (gain) loss on disposition of assets and (501) 5 (565) (164)
insurance settlement proceeds
Extraordinary items 28 443 28 443
--------------------------------------------------------
Funds from operations $ 14,425 $ 14,415 $ 28,302 $ 28,558
========================================================
Weighted average shares and units:
Basic 20,408 20,332 20,390 20,374
Diluted 20,659 20,416 20,586 20,431
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 TO THE THREE MONTHS ENDED
JUNE 30, 2001
Property revenues for 2002 decreased by approximately $761,000 due to decreases
of (i) $942,000 from the sale of the Advantages and Canyon Creek apartments in
2001 (the "2001 Dispositions"), and (ii) $494,000 from the communities held
throughout both periods. These decreases were partially offset by an increase in
property revenues of $675,000 from the communities in development that were in
lease-up (the "Development Communities").
Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and other property related costs. Property operating expenses for 2002 increased
by approximately $283,000 due primarily to increases of (i) $201,000 from the
Development Communities, and (ii) $437,000 from the communities held throughout
both periods. These increases were partially offset by a decrease in operating
expense of $355,000 from the 2001 Dispositions.
Property management expenses decreased approximately $215,000 over the same
period last year mainly related to decreases in bonuses. General and
administrative expenses remained relatively flat over the first quarter of last
year.
Depreciation and amortization expense increased by approximately $553,000
primarily due to the increases of (i) $127,000 from the Development Communities,
and (ii) $597,000 from the communities held throughout both periods. These
increases were partially offset by the depreciation and amortization expense
decrease of $171,000 from the 2001 Dispositions.
Interest expense over the three months ended June 30, 2001, decreased by
approximately $1,481,000 as refinancings of debt in 2001 and the drop in
variable rates since June 30, 2001, decreased the Company's average interest
rate from 6.8% at June 30, 2001 to 6.2% at June 30, 2002.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001
Property revenues for 2002 decreased by approximately $1,383,000 due to
decreases of (i) $1,863,000 from the 2001 Dispositions, and (ii) $1,004,000 from
the communities held throughout both periods. These decreases were partially
offset by an increase in property revenues of $1,484,000 from the Development
Communities.
Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and other property related costs. Property operating expenses for 2002 increased
by approximately $668,000 due primarily to increases of (i) $385,000 from the
Development Communities, and (ii) $950,000 from the communities held throughout
both periods. These increases were partially offset by a decrease in operating
expense of $667,000 from the 2001 Dispositions.
Property management expenses decreased approximately $332,000 over the same
period last year mainly related to decreases in certain health benefits and
bonuses. General and administrative expenses remained relatively flat over the
first half of last year.
Depreciation and amortization expense increased by approximately $1,065,000
primarily due to the increases of (i) $426,000 from the Development Communities,
and (ii) $965,000 from the communities held throughout both periods. These
increases were partially offset by the depreciation and amortization expense
decrease of $326,000 from the 2001 Dispositions.
Interest expense over the six months ended June 30, 2001, decreased by
approximately $2,578,000 as refinancings of debt in 2001 and the drop in
variable rates since June 30, 2001, decreased the Company's average interest
rate from 6.8% at June 30, 2001 to 6.2% at June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities decreased to approximately
$37,380,000 for the first half of 2002 from $42,605,000 for the first half of
2001 mainly due to changes in other assets. The Company experienced a fire at
its corporate headquarters on March 3, 2002. Included in other assets is $2.2
million of costs related to the fire which the Company expects to be fully
covered by the Company's insurance. Also included in other assets is $3.3
million representing the purchase of a plane. The Company purchased a plane in
2002 to lower the operating expense associated with the previous leasing
arrangement.
During the first six months of 2002, the Company invested $1,394,000 in
construction of new assets, reduced from $12,495,000 during the same period in
2001. With the end of construction of Reserve at Dexter Lake III in June 2002,
the Company has completed the entire $300 million development program begun in
1997.
The following table summarizes the Company's remaining communities in various
stages of lease-up, as of June 30, 2002 (Dollars in thousands):
Anticipated
Total Finish Initial Stabil-
Location Units Date Occupancy ization
------------- ----- ------- --------- -----------
Completed Communities
In Lease-up:
Grand Reserve Lexington Lexington, KY 370 3Q 2000 4Q 1999 2Q 2002
Grand View Nashville Nashville, TN 433 2Q 2001 3Q 2000 2Q 2002
Reserve at Dexter Lake II Memphis, TN 244 2Q 2001 1Q 2000 3Q 2002
Reserve at Dexter Lake III Memphis, TN 244 2Q 2002 2Q 2001 4Q 2002
The Company's projections assume that the four properties completed but still
under lease-up will substantially stabilize during 2002. At June 30, 2002, 1,100
of the 1,291 apartments were leased, and the Company believes that the
completion of stabilization of these properties in 2002 is highly likely. The
Company does not anticipate that its liquidity will be impacted should these
properties fail to stabilize in 2002.
Capital improvements to existing properties during the first half of 2002 and
2001 totaled $7,987,000 and $8,973,000, respectively. Actual capital
expenditures are summarized below (Dollars in thousands):
June 30, 2002 June 30, 2001
Recurring capital expenditures at stabilized properties $ 5,395 $ 6,377
Revenue enhancing capital expenditures at stabilized properties 2,119 1,924
Capital improvements to pre-stabilized properties 214 -
Corporate/commercial capital improvements 259 672
------------- -------------
$ 7,987 $ 8,973
Net cash used in financing activities decreased from approximately $26,732,000
for the first six months ended June 30, 2001 to approximately $24,209,000 during
the same period in 2002. During the first half of 2002 the Company increased its
credit lines by $16,020,000 as compared to $2,274,000 in the first half of 2001.
During the first half of 2001, the Company used a net of $2,878,000 to
repurchase shares of its common stock. No shares were repurchased during the
first half of 2002.
At June 30, 2002, the Company had $302,739,000 outstanding of a secured credit
facility with Prudential Mortgage Capital, credit-enhanced by FNMA ("FNMA
Facility"), which matures in 2009. The FNMA Facility provides for both fixed and
variable rate borrowings, and at June 30, 2002 was fully drawn under the terms
of the borrowing base calculations in effect. The interest rate on the variable
portion renews every 90 days and is based on the FNMA Discount Mortgage Backed
Security ("DMBS") rate on the date of renewal, which has typically approximated
three-month Libor less an average spread of 0.09%, plus a credit enhancement fee
of 0.67% based on the outstanding borrowings. The variable interest rate at June
30, 2002 was 2.51%. Fixed rate borrowings under the FNMA Facility totaled $110
million at June 30, 2002, at interest rates (inclusive of credit-enhancement
fees) from 5.77% to 7.71%, and maturities from 2006 to 2009.
Compass Bank provides an unsecured credit facility to the Company. There was $10
million outstanding under this facility at June 30, 2002.
The Company uses interest rate swaps to manage its current and future interest
rate risk. The Company has $100 million of interest rate swaps outstanding of
three-month Libor fixed leg and $25 million of interest rate swaps outstanding
of one-month Libor fixed leg, with expirations between 2003 and 2007, and which
have to date proven to be highly effective hedges of the Company's variable rate
debt. Through the use of these swaps the Company believes it has effectively
fixed the rate during these periods of $125 million of variable rate borrowings
issued through the FNMA Facility, leaving only $67,739,000 of the FNMA Facility
of which the interest rate has not been hedged. The Company has also issued a
$16,990,000 swap of the BMA Municipal index, expiring in June, 2008, effectively
fixing the interest rate of the Tax-Free Bond Facility at 5.15% through this
period, which is a highly effective hedge. In 2001, the Company executed two $25
million notional amount forward interest rate swaps of three-month Libor fixed
leg: a two-year swap effective March 2003, and a four-year swap effective
September, 2003. In June 2002, the Company executed an additional $25 million
notional amount forward interest rate swap of three-month Libor fixed leg. The
instrument is a four-year swap effective April 2003. The swaps are intended to
reduce the interest rate risk of future planned refinancings.
The weighted average interest rate and the weighted average maturity at June 30,
2002, for the $788.1 million of debt outstanding were 6.2% and 9.5 years,
compared to 6.8% and 10.4 years at June 30, 2001.
The Company has one individual mortgage maturing for $9.2 million in the third
quarter of 2002. The Company is in the process of finalizing the refinancing of
this mortgage with an expanded FNMA Facility.
In 2003, the Company has debt maturities approximating $154 million, which it
anticipates will be funded by replacement debt issued at comparable interest
rates. There is both interest rate and financing risk associated with these
refinancings; however, the Company believes it to be extremely unlikely that
there will be a refinancing problem due to the large amount of collateral
available to support the amount of debt. In the highly unlikely event of a
complete collapse of the debt markets, the Company could be faced with liquidity
concerns.
Beginning in December 2003, with six months' notice, the holder of the Series E
Preferred, (totaling $25 million), has the option of redeeming all or part of
the shares for cash or an equivalent value in the Company's common stock (at the
Company's option). The Company anticipates that the Series E Preferred will not
be redeemed for common stock, and plans to maintain credit facilities and
balance sheet capacity sufficient to redeem the entire series for cash should
the opportunity for repurchase be presented.
The Company believes that it has adequate resources to fund both its current
operations, regular annual refurbishment of its properties, and incremental
investment in new apartment properties. The Company believes that the income
from the full lease-up and stabilization of its development properties and its
growth of same-store NOI will create greater asset values, which enables it to
increase its borrowing capacity while lowering or maintaining its loan to value
ratio. The Company is relying on the efficient operation of the financial
markets to finance debt maturities, and also is heavily reliant on the
creditworthiness of FNMA, which provides credit enhancement for over $300
million of the Company's debt. The market for FNMA DMBS, which in the Company's
experience is highly effective with three-month Libor fixed leg, is also an
important component of the Company's liquidity and swap effectiveness. In the
event that these markets became less efficient, or the credit of FNMA became
impaired, the Company would seek alternative sources of debt financing.
The Company believes that cash provided by operations is adequate and
anticipates that it will continue to be adequate in both the short and long-term
to meet operating requirements (including recurring capital expenditures at the
communities) and payment of distributions by the Company in accordance with REIT
requirements under the Internal Revenue Code. The Company has loan covenants
that limit the total amount of distributions, but believes that it is unlikely
that these will be a limiting factor on the Company's future levels of
distributions. The Company expects to meet its long-term liquidity requirements,
such as scheduled mortgage debt maturities, property acquisitions, preferred
stock redemptions, expansions, and non-recurring capital expenditures, through
long and medium term collateralized fixed rate borrowings, issuance of debt,
potential joint venture transactions and the Company's credit facilities.
At June 30, 2002 and 2001, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. The Company's joint venture
with Blackstone Real Estate Acquisitions, LLC was established in order to sell
assets to fund development while acquiring management fees to help offset the
reduction in revenues from the sale. In addition, the Company does not engage in
trading activities involving non-exchange traded contracts. As such, the Company
is not materially exposed to any financing, liquidity, market, or credit risk
that could arise if it had engaged in such relationships. The Company does not
have any relationships or transactions with persons or entities that derive
benefits from their non-independent relationships with the Company or its
related parties other than what is disclosed in Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements Note 11 in the
Company's 2001 Annual Report on Form 10-K.
INSURANCE
The Company put in place a new insurance program effective July 1, 2002. The
program is substantially the same as last year, but includes greater retention
levels for liability and workers' compensation insurance. The Company was unable
to obtain a reasonable quote for coverage against acts of terrorism for the
policy renewal, but will continue to monitor changes in the market. In the
opinion of management, property and casualty insurance is in place that provides
adequate coverage to provide financial protection against normal insurable risks
such that it believes that any loss experienced would not have a significant
impact on the Company's liquidity, financial position, or results of operations.
INFLATION
Substantially all of the resident leases at the communities allow, at the time
of renewal, for adjustments in the rent payable thereunder, and thus may enable
the Company to seek rent increases. The substantial majority of these leases are
for one year or less. The short-term nature of these leases generally serves to
reduce the risk to the Company of the adverse effects of inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations
(Statement 141), and Statement No. 142, Goodwill and Other Intangible Assets
(Statement 142). Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (Statement 144).
The Company adopted the provisions of Statement 141 as of July 1, 2001, except
with regard to business combinations initiated prior to July 1, 2001. The
Company adopted the provisions of Statement 142 effective January 1, 2002.
Furthermore, goodwill and intangible assets determined to have an indefinite
useful life acquired in a purchase business combination completed after June 30,
2001, but before Statement 142 is adopted in full will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature.
Statement 141 requires upon adoption of Statement 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
As of the date of adoption, the Company had unamortized goodwill of
approximately $5,800,000, which will be subject to the transition provisions of
Statements 141 and 142. The Company ceased amortizing goodwill as of January 1,
2002. The amortization expense related to goodwill for the six months ended June
30, 2001 was $132,000.
The Company adopted Statement 142 as of January 1, 2002 and has since completed
the process of evaluating its goodwill balances to determine if any impairment
exists. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the Company's
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of the date of adoption. The Company then calculated
the estimated fair value of each reporting unit and compared it to the carrying
amount of each reporting unit.
The Company's testwork indicated no impairment of goodwill for its reporting
units.
The Company will continue to test reporting unit goodwill for potential
impairment on an annual basis in the Company's fiscal fourth quarter, or sooner
if a goodwill impairment indicator is identified.
In August 2001, FASB issued Statement 144 which supersedes both FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (Statement 121) and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions (Opinion 30), for the
disposal of a segment of a business (as previously defined in that Opinion).
Statement 144 retains the fundamental provisions in Statement 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with Statement 121. For example,
Statement 144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. Statement 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike Statement
121, an impairment assessment under Statement 144 will not result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under
Statement 142.
The Company adopted Statement 144 effective January 1, 2002. The adoption of
Statement 144 for long-lived assets held for use did not have a material impact
on the Company's financial statements because the impairment assessment under
Statement 144 is largely unchanged from Statement 121.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections
(Statement 145). The rescission of Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt and Statement No. 64, Extinguishments of Debt made
to Satisfy Sinking-Fund Requirements eliminates an exception to general practice
relating to the determination of whether certain items should be classified as
extraordinary and is effective in fiscal years beginning after May 15, 2002,
with earlier implementation encouraged. The amendment of Statement No. 13,
Accounting for Leases affects the accounting by the lessee for certain lease
modifications that have economic effects similar to sale-leaseback transactions
and Intangible Assets for Motor Carriers removes a no longer relevant standard
from the authoritative literature. The rescission of Statement No. 44 and all
other provisions of Statement 145 are effective for financial statements issued
on or after May 15, 2002. The impact of adopting Statement 145 is not expected
to be material.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (Statement 146). Statement 146 requires all
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Statement 146 is to be applied prospectively to exit or disposal
activities after December 31, 2002. The impact of adopting Statement 146 is not
expected to be material.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. These statements include, but are not limited
to, statements about anticipated growth rate of revenues and expenses,
anticipated lease-up (and rental concessions) at development properties, planned
asset dispositions, disposition pricing, and planned acquisition and
developments. Actual results and the timing of certain events could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including a continued downturn in general
economic conditions or the capital markets, competitive factors including
overbuilding or other supply/demand imbalances in some or all of our markets,
changes in interest rates, and other items that are difficult to control such as
insurance rates, increases in real estate taxes, and other general risks
inherent in the apartment business. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this report on Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
This information has been omitted as there have been no material changes in the
Company's market risk as disclosed in the 2001 Annual Report on Form 10-K.
PART II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on
June 10, 2002.
Messrs. H. Eric Bolton, Jr., Alan B. Graf, Jr. and Ralph Horn
were elected to serve as directors at the meeting by 94%, 98% and
98%, respectively, of the shares represented at the meeting.
KPMG LLP was ratified as the Company's independent public
accountants for the 2002 fiscal year by 99% of the shares
represented at the meeting.
The Fourth Amended and Restated 1994 Restricted Stock and Stock
Option Plan was adopted by 89% of the shares represented at the
meeting.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
None
(b) Reports on Form 8-K
Form Event Reported Date of Report Date Filed
8-K 1Q02 conference call transcript 5-2-2002 5-2-2002
and press release
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MID-AMERICA APARTMENT COMMUNITIES, INC.
Date: August 14, 2002 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)